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Commentary

Kinder More Valuable Together Than Apart

We’re boosting our fair value estimate of Kinder Morgan as the firm’s new structure removes the burden of incentive distributions and will likely support 10% annual dividend growth, says Morningstar’s Jason Stevens.

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We are raising our fair value estimate for  Kinder Morgan (KMI) following the announcement of a plan to consolidate  Kinder Morgan Energy Partners (KMP),  Kinder Morgan Management (KMR), and  El Paso Pipeline Partners (EPB) into a single corporation. As we indicated in our last note, this consolidation removes the burden of incentive distributions, which weighed on distribution growth to limited partners at KMP, and sets up a structure we believe is likely to support 10% annual dividend growth at KMI. This pace of dividend growth is higher than we had anticipated, supporting our new $40 fair value estimate for KMI. We think it is exceedingly likely this transaction will close by year-end.

Under the terms of the deal, unitholders of KMP will receive $10.77 cash and 2.1931 shares of KMI for each unit owned, valuing KMP at $98.50 at our $40 fair value for KMI. Unitholders of EPB will receive $4.65 cash and 0.951 shares of KMI for each unit owned, valuing EPB at $42.45. Shareholders of KMR will receive 2.4849 shares of KMI for each share of KMR, equating to $99.40 at our $40 fair value of KMI. Interestingly, due to the cash and stock compensation offered KMP unitholders versus the pure stock compensation for KMR shareholders, the math works out in favor of KMR owners when KMI's stock price is above $37 per share; at our $40 per share estimate, the deal values shares of KMR $0.90 higher than equivalent units of KMP.

Jason Stevens does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.